RBA reveals cash rate verdict

Increases over the last week by the likes of Westpac and Suncorp had led most pundits to believe the RBA would be effectively forced to leave rates on hold for the foreseeable future.

However, today the RBA moved to counteract those increases, and slashed the official cash rates by 25 basis points to a new record low of just 1.25 per cent.

It marks an unexpected lurch down from the previous record low of 1.5 per cent that had been in place for two years – the longest ever run of interest rate stability in Australia.

Unclear why rates were cut

During its last meeting on 7 August, the RBA board had examined an economy in generally good health.

It noted steady growth in retail sales and employment, housing prices continuing to come off the boil (except in the booming Hobart market) and overall growth expected to sit just above 3 per cent in 2018 and 2019.

Of concern, though, was the ongoing drought gripping NSW and much of Queensland, which is impacting agriculture production and exports.

Inflation – the key driver of interest rate movements – remains relatively subdued at 2.1 per cent, and is expected to remain subdued for some time to come.

“Strong competitive pressures and low growth in wage costs had been placing downward pressure on retail prices for some time,” the board noted in its minutes.

‘We thought rates would stay on hold’: industry

Pundits had widely anticipated no change from the RBA, believing that independent hikes by lenders were restraining the central from doing so even if it had wanted to. But none had seen any need for the RBA to cut rates.

On Wednesday (29 August), Westpac became the first of the majors to raise rates, increasing all of its standard variable rates by 14 basis points. Suncorp followed suit two days later with a 17-basis-point increase on variable home loans, and a 10-basis-point rise on small business loans.

“There are plenty of factors keeping interest rates on hold, but top of mind is the fact that mortgage rates are already edging higher as lenders look to balance their profit margins against higher funding costs and a smaller deposit base,” Tim Lawless, head of research of property data firm CoreLogic, had said ahead of the decision.

“With the first of the big four banks announcing an out-of-cycle rate hike, the prospects for a higher cash rate have likely been pushed back even further; we could even see debate for a lower cash rate becoming more prominent.”

Likewise, all 30 panellists from the finder.com.au RBA survey had anticipated that official rates would remain on hold.

“The belief that the cash rate won’t budge combined with increased funding pressure from overseas has spurred Westpac, Suncorp and other major banks to hike mortgage rates out-of-cycle,” the comparison site’s insights manager, Graham Cooke, had said.

“We expect this trend to continue, with the remaining of the big four and other lenders likely to follow suit in the coming days.

“Mortgage holders should brace themselves for higher interest rates – it’s not a matter of if, but when.”

[Related: RBA outlook 'too optimistic', say economists]